SIMON BROWN: When you get investments wrong

As an investor, being wrong is something that happens — often. What matters is how you know when you’re wrong and what you do when you are.

Recently, I was buying some Pick n Pay shares. Yes, they’d been beaten down and a rights issue was possible. But the price action was looking good and if anybody could fix this former blue chip it was the new/old CEO, Sean Summers.

To me the risks were a possible R4bn rights issue (at the upside, I thought it would be less than this), the struggling consumer (though this is improving) and, of course, Shoprite*, South Africa’s food retail juggernaut. Yes, maybe fixing the retailer was harder or would take much longer than even Summers expected, but …

All was good and the price was moving higher, hitting R27.77, putting me nicely in profit and leaving me feeling very smart.

Then came the horror update. A R4bn rights issue, debt doubling, breach of debt covenants and the listing of its crown jewel, Boxer. This was bad — way worse than I’d expected and way worse than the market expected, as we saw from the sell-off.

So, I was wrong. This was an easy one to spot.

The key point is how you know you’re wrong. For this, I always follow the same strategy in my investing: I write down what I like and what I think the risks are.

With Pick n Pay the key risk was a possible rights issue at R4bn. The Sens update quickly told me that I was totally wrong, there was no need for me to revisit anything or try to understand what was happening.

I had a theory about the business and had acted on it and the reality quickly showed me that my theory was in tatters.

It’s immensely useful, having the two lists; when you’re faced with a collapsing price you don’t have to think — just check your notes and act accordingly.

So now what? Well, exit. I sold all my Pick n Pay shares, taking the loss nice and quick. Since my selling, the stock is another 15% lower, saving me a bunch.

This is an important point. When it’s time to panic (and here it certainly was), panic quickly. Don’t wait around wondering if you should get out; get out quickly and live to invest another day.

Sometimes a price falls and you check your notes, and you’re not wrong. Now what?

Here, I double down on my research, checking my theories. If they hold up and the news hasn’t thrown them out the window, then there are no worries. This is more about a market reaction and frankly, maybe the market is wrong — though that’s a bold statement.

I also list good things, so I can see what I like and if they’re starting to break. Both lists help me know what to hold and what to bail on.

*The writer holds shares in Shoprite